If you are a business owner in the automotive industry and provide goods or services, you typically issue an invoice to the customer. This invoice must be paid within a certain period. If the customer does not pay on time, you, as the business owner, have the right to charge the customer a late fee or collection costs to cover the expenses incurred in sending the reminder.
What late fees are permitted?
If your customer fails to make a payment, you have the right to charge fees or late fees. These fees may not be very high, but they compensate you for the time and expense involved in sending the reminder. In some cases, late fees can also help encourage a customer to pay.
How much can late fees be?
If you decide to set late fees for your business, there are two important points to keep in mind: 1. The fee must be reasonable. 2. The fee must be transparent and remain within a reasonable range that reflects your actual costs .
If you opt for a three-step collection process, the collection fee for the first reminder could be €2.50, for the second reminder €5.00, and for the third reminder €7.50. These figures are only rough estimates—your actual costs (e.g., for postage, paper, and envelopes) as well as the time required to send the invoices should always be taken into account when determining your fees.
It is common practice to charge a fee of 2 to 3 euros for each reminder stage. Reminder fees in this range are not considered excessive. The safest option is therefore to set the fee at 2.50 euros per stage.
The fee you charge must be reasonable. You should be able to justify the fee and keep it within a reasonable range that covers your actual costs. This way, you can ensure that your charges are justified and your customers are satisfied.
Late fees are not late payment interest
You can add both collection fees and late payment interest to the original invoice amount in your demand letter. This applies to both civil collection proceedings and court-ordered collection proceedings, in which you notify the local court of the amount claimed—which includes the invoice amount, late payment interest, and, of course, the collection fee of your choice.
You have a fair amount of leeway when it comes to setting the amount of the late fee, as long as you stay within reasonable limits. (Of course, you can’t simply choose €100.00 instead of €2.50—that would be considered unreasonable, and it would also be difficult to justify.) Late payment interest, on the other hand, is calculated precisely according to a set formula, with no leeway.
Are late fees subject to sales tax?
No sales tax is added to late fees. Therefore, when you send a reminder, you are sending a reminder for the original invoice amount—if the invoice includes sales tax, the invoice amount consists of the net amount plus sales tax. The late fees that appear on your reminder are not subject to sales tax.
Please note the following when posting entries:
- The late fees are recorded as other income, and no sales tax is due because there is no exchange of services.
- Interest should be recorded as interest income. No sales tax is due on this either.
- Collection fees are considered incidental costs associated with financial transactions. The offsetting entry must be posted to the “Other Income” account—this entry therefore has no effect on profit or loss and is thus tax-free!
Late fees – short and sweet
Collection fees are therefore considered actual compensation for damages and are thus not subject to sales tax. The recipient of a collection notice that includes collection fees may also claim only the sales tax on the original invoice amount in their input tax return. The safest option for the fee amount is 2.50 euros per collection stage.
You can enter the late fees in CATAMA in the Order Editor under the "Dunning" section. These will appear on the dunning notice as late fees below the invoice amount.
If you have any questions about entering reminders in CATAMA, our support team is always available to assist you.
